When you buy a life insurance policy, you are essentially investing in your future. If something happens to you and you have dependents who rely on your income, the life insurance policy will provide them with money to help cover expenses and maintain their standard of living. However, what happens if you no longer need the policy?
Can you cash it out? Stay tuned as we discuss what happens when you cash out a life insurance policy and answer some of the most commonly asked questions about the process. We will also provide tips for those who are considering cashing out their policy.
So whether you are thinking about cashing out or just want to learn more about the process, keep reading!
What Is A Life Insurance Policy?
A life insurance policy is a contract between you and an insurance company. You pay premiums (usually monthly or yearly) and in exchange, the insurance company agrees to pay a death benefit to your beneficiaries in the event of your death.
The death benefit is typically used to cover expenses like funeral costs and outstanding debts, as well as provide financial security for loved ones who depend on your income.
To sell a term life insurance policy on the market, you have to be what’s called “insurable.” This means that you must pass a medical exam and meet the underwriting criteria of the insurance company. Once you have a policy, you can name beneficiaries (the people who will receive the death benefit) and keep the policy for as long or as little as you like.
Types of Life Insurance Policies
There are two main types of life insurance policies: term life insurance and whole life insurance.
- Term life insurance is temporary and only covers you for a set period, usually 10-30 years. If you die during the term of the policy, your beneficiaries will receive the death benefit. If you outlive the term, the policy expires and you (or your beneficiaries) get nothing. Because term life insurance is temporary, it tends to be less expensive than whole life insurance.
- Whole life insurance, on the other hand, covers you for your entire life as long as you continue to pay the premiums. It also builds cash value over time, which you can borrow against or cash out if you need the money. Whole life insurance is more expensive than term life insurance because it’s permanent and has an investment component.
- Universal life insurance is a type of whole life insurance that gives you more flexibility in how much you pay in premiums and how often you make premium payments. The cash value of a universal life policy grows tax-deferred and can be accessed through loans or withdrawals.
- Variable universal life insurance is similar to universal life insurance, but with one key difference: the cash value is invested in sub-accounts, which are similar to mutual funds. The performance of the sub-accounts will determine how much cash value the policy has.
Is It Possible To Cash Out A Life Insurance Policy?
Yes, it is possible to cash out a life insurance policy, but there are a few things you need to know first. When you cash out a life insurance policy, you are essentially selling your policy for its “cash surrender value.” The cash surrender value is the amount of money the insurance company will give you if you cancel your policy.
It is different from the death benefit because it does not take into account the face value of the policy (the amount your beneficiaries would receive if you died).
The cash surrender value is typically much less than the death benefit because it does not include the “time value of money.” In other words, the insurance company is taking into account the fact that you are cashing out early, and they will not have to pay the death benefit for many years (if at all).
How Much Is The Cash Surrender Value?
The cash surrender value depends on several factors, including the type of policy, the age of the policyholder, and how long the policy has been in effect.
Whole-life policies tend to have higher cash surrender values than term-life policies because they build cash value over time. Universal life and variable universal life policies also have cash surrender values, but they can be more difficult to calculate because of the sub-accounts.
How To Cash Out A Life Insurance Policy
If you want to cash out your life insurance policy, there are a few things you need to do. First, you need to find a life insurance buyer who is willing to pay you the cash surrender value of your policy. Several companies specialize in buying life insurance policies, but it’s important to shop around and compare offers before you sell.
You will also need to provide the buyer with some information about your policy, including the type of policy, the face value, and the cash surrender value.
Once you have found a buyer and agreed on a price, the buyer will pay you the cash surrender value of the policy and then take over the payments. It’s important to note that if you cash out your life insurance policy, you will no longer be covered and your beneficiaries will not receive the death benefit.
The Pros And Cons Of Doing So
Cashing out a life insurance policy has its pros and cons. On the plus side, you will get a lump sum of cash that you can use for any purpose. And if you have a whole life or universal life policy, you may be able to borrow against the cash value of your policy.
On the downside, cashing out early will typically result in a much lower death benefit for your beneficiaries. And if you have a term-life policy, there is no cash value to borrow against.
Cashing out a life insurance policy is possible, though there may be some fees and taxes associated with doing so. It’s important to speak with your life insurance agent or financial advisor to see if cashing out is the right move for you.
So long as you are aware of the pros and cons, cashing out a life insurance policy is a viable option for some policyholders.
